|» INVESTING IN INDIA|
With a GDP of over USD 1,300 billion and an annual savings rate from the households of 34%, there is a pool of USD 400 billion every year in India that can be put to use.
This USD 400 billion of annual savings finds its way into:
1) investments in bank deposits,So, it is not that this USD 400 billion of savings is really lying idle.
Nope, it is pretty much committed.
Taxation can shovel savings where it is needed
The government knows that India needs to build assets and infrastructure for the future. Whether it is ports, power plants, railways, or roads. And the government has admitted that it needs private pools of capital to help.
Wouldn't this have been the perfect time to build a bridge between the long term savings of individuals and the long term financing needed for building infrastructure? Not only the infrastructure as defined by the government but any investment in any business.
With a nudge from a better Direct Tax Code, the savings could be directed a little more intelligently to areas of focus.
Investing in gold is not the ideal thing from an economy's viewpoint and most economists think of gold as an unproductive and dead investment. (Individuals, however, must always own gold because most economists never factor into their excel sheets and forecasts the shocking actions of governments and politicians who can end up destroying economies.)
Also, if infrastructure is built out in a sensible way, it can destroy the value of existing properties in overvalued cities like Bombay and allow those who still need to buy homes (the majority) to buy homes cheaper. Money that is currently wasted on highly expensive homes with no water or power connections will be used to buy less expensive homes with water and power connections. And schools, hospitals, and parks. Since property prices will be dramatically lower, individuals will have more savings.
The Direct Tax Code should have a clause that reads: "capital gains from investment in shares of any listed company held for over 5 years by any individuals should be free of tax." Such a clause will also allow the government to implement the planned further dilution of its ownership in various listed entities like ONGC, NTPC, and NMDC.
And it will encourage investors to start focusing on long term investments in the share markets rather than the current obsession with speculating. To cement this, the Direct Tax Code should have another clause that reads: "capital gains from shares held for less than 1 year will be taxed at the marginal rate of taxation and treated as normal business income and capital gains from shares held for between 1 year and 5 years will be taxed at a flat rate of 20%".
Using taxation policies is a common way for government's to encourage a certain behaviour or response. For example, the decision to allow interest on home loans to be deducted from income is based on the expectation that individuals would like to own homes and the government would like to be seen to support the concept of "home ownership". The rationale being that a satisfied home owner is more likely to vote for the government that supports such a taxation policy.
Governments also give tax incentives to companies (by way of depreciation benefits) to encourage them to invest more and create jobs. Again, a way to get support at the time of elections.
--------------------- Do you like the "Quantum way"? ---------------------
If you've been reading the Honest Truth and like what Ajit has to say, we are sure you would be pleased to make our acquaintance.
We are, Quantum Mutual Fund, a fund house that works on a set philosophy - the same philosophy reflected in the Honest Truth - Non-commissions, Transparent Costs, Basic Products, Long Term Investing!
Give us a chance to know you better. We're just a click away!
How misguided taxation can benefit a few
But not all tax-based incentives are necessarily good.
The tax breaks given to PPF and other such saving programmes look good for us on paper but may not end up being good for us as savers over the long term. We get a higher rate of interest from a tax incentive but - by having the PPF funds at their disposal - politicians can continue to use our money to make good on their vote catching promises to many constituents. These handouts are financed by our savings. Continuous over-spending can lead to a decimation of our savings due to high inflation and a weakened economy. At the end of the day, the people who benefit from these tax breaks are the politicians, not the savers!
At the corporate level, the tax breaks given to SEZ were sold to us as job creation incentives but, actually, were favours to real estate developers and industrialists. The SEZ policy was a slap on the face for villagers whose land was forfeited at low prices. The ridiculously low taxation imposed on forest land that allows large companies "mining rights" is a tax that has taken away land from tribals and effectively shovelled off the wealth to the larger companies. The Maoist movement, according to an article by Arundhati Roy in Outlook, has apparently grown due to such inequalities.
Since taxation policies have ended in "bad" results, could we not use the tax incentives to create a certain behavioural pattern and "good" result? The good result being a better India with more public transportation and more useful goods like schools and hospitals.
But the DTC shows the emptiness of thought process and the vacuum in planning.
Not only have the various ministries shown a lack of an India Vision, but the Ministry of Finance has not shown any ability of linking the needs of the country to build infrastructure with the potential of creating long term wealth for India's own citizens and savers as owners and financiers of these long term assets.
While everyone is busy fighting over the pace of the road construction projects, they failed to build this simple bridge. To connect the dots between the domestic savers and the need to finance infrastructure.
It could be that the powers that be are so caught up seeking advice from the global financial firms because "Invest in India" marketing trips to London and New York to raise the capital India needs is far more fun than the bumpy journey on the dusty roads to Ludhiana and Nagpur.
If you believe that the Direct Tax Code should be amended to encourage long term investment as outlined in Table 2, please click here to suggest the implementation of Table 2.
Your suggestion could be -
I believe that the DTC must give benefits to long term investors by adopting the following tax code for capital gains in listed shares as per Table 1 below. This will also help fund the Rs 2,00,000 crore required from the private sector for funding India's ambitious Rs 50,00,000 crore in infrastructure projects.
Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)